Globalisation has led to an increasingly interdependent world, with companies based in one country often dependent on a market abroad. In recent years, it is the rapid growth of countries like China that has led to growth in the size of the markets for many products. With incomes rising in emerging countries, demand for many products has been growing, but in the past year, the trend for Prada has ended and seems to be reversing.
As the market in China matures and growth of demand in Europe slows, Prada has seen its shares fall by the largest margin since June last year.
Prada is a well-known luxury brand. The products it sells are relatively expensive and hence its products are likely to have an income elasticity of demand well above +1. With changes in China and Europe, Prada expects its growth in sales to January 2015 will be ‘low single-digit’ – less than the 7% figure recorded for the last financial year.
This lower growth in same-store sales is likely to continue the following year as well. Add on to this the lower-than-expected profits, which missed analysts’ forecasts, and you have a prime example of a brand that is suffering because of its customer base and the economic times.
Prada isn’t alone in suffering from economic conditions and, relative to its European counterparts, is expected to have higher growth in sales and profits in the next 12 months – at 11.5% and 14.8% respectively. This is according to a survey by Thomson Reuters.
Prada has exploited high demand by Chinese consumers, but has recently been affected by the strength of the euro. A strong euro means that the Italian-based Prada is struggling with exports, which only adds to its problems. As economic growth picks up in China and as other emerging economies begin to experience more rapid economic growth, the fortunes of this luxury-retailer may change once more. However, with volatile economic times still around in many countries, the future of many retailers selling high-end products to higher income customers will remain uncertain. The following articles consider the fortunes of Prada.
Prada shares fall sharply after China luxury warning BBC News (3/4/14)
Prada falls after forecasting slowing luxury sales growth Bloomberg, Andrew Roberts and Vinicy Chan (3/4/14)
Prada profits squeezed by weakness in Europe and crackdown in China The Guardian (2/4/14)
Prada bets on men to accelerate sales growth Reuters, Isla Binnie (2/4/14)
Prada misses full year profit forecast Independent, Laura Chesters (2/4/14)
Questions
- How can we define a luxury product?
- Explain the main factors which have led to a decline in the demand for Prada products over the past 12 months.
- Using a diagram, illustrate what is meant by a strong euro and how this affects export demand.
- What business strategies are Prada expected to adopt to reverse their fortunes?
- Using a diagram, explain the factors that have caused Prada share prices to decline.
Over the past few years lobster prices in Maine have tumbled. Eight years ago the price paid to fishermen was around $4.60 per pound. Today it’s around $2.20. The problem is one of booming lobster populations and the dominance of lobster in catches. Last year’s haul was double that of a decade ago and, in some waters, six times higher.
You would think that larger catches would be good news for fishermen. But prices now are so low that they barely cover variable costs. Individual fishermen fish harder and longer to bring in even bigger catches to make up for the lower price. This, of course, compounds the problem and pushes the price even lower.
So what are the answers for the fishermen of Maine? One solution is to diversify their catch, but with lobster so plentiful and other fish stocks depleted, this is not easy.
Another solution is to cooperate. The Reuters article below quotes John Jordan, a lobsterman and president of Calendar Islands Maine Lobster Co.:
‘If you had an industry that actually cooperated, you wouldn’t be bringing in more product if you couldn’t sell what you already had, right?’
Restricting the catch would require lobster distributors to cooperate and set quotas for what the fishermen would be permitted to sell. But with over 5000 fishermen, this is not easy.
Another solution is to expand the market. One way is for the distributors or other agencies to market lobster and lobster products more aggressively. For example, 
this year the State of Maine has established a $2 million marketing collaborative. Another solution is to find new markets.
Jordan’s company and others are frantically seeking new ways to sneak lobster into unexpected corners of the food market, from gazpacho to puff pastries and quiche.
In the meantime, for consumers the question is whether the low prices paid to the fishermen of Maine will feed through into low prices in the fishmonger, supermarket and restaurant. So far that does not seem to be happening, as the final two articles below explain.
Webcasts
US lobster fishermen’s ‘problem of plenty’ BBC News, Jonny Dymond (5/10/13)
Maine lobstermen in a pinch over low prices, record catch: Part 1, Part 2, Part 3 Aljazeera America, Adam May (11/10/13)
Articles
Something fishy is going on in the nation’s lobster capital CNBC, Heesun Wee (1/9/13)
Booming lobster population pinches profits for Maine’s fishery Reuters, Dave Sherwood (25/8/13)
Lobster’s worth shelling out for The Observer,
Rachel Cooke (21/9/13)
Clawback The New Yorker, James Surowiecki (26/8/13)
Why The Glut Of Cheap Lobster Won’t Lower Price Of Lobster Rolls Gothamist, John Del Signore (20/7/12)
Questions
- Why have lobster prices paid to fishermen fallen? Illustrate your argument with a demand and supply diagram
- What has determined the size of the fall in prices? What is the relevance of price elasticity of demand and price elasticity of supply to your answer?
- How is the fallacy of composition relevant to the effects on profits of an increase in the catch by (a) just one fisherman and (b) all fishermen? What incentive does this create for individual fishermen in a competitive market?
- What can lobster fishermen do to restore profit margins through collaborative action?
- In what ways is there a conflict between economics and ecology in the lobster fishing industry?
- How does stored lobster affect (a) the price elasticity of supply and (b) the price volatility of lobster?
- How could cooperation between lobster fishermen and lobster processors and distributors benefit all those involved in the cooperation?
- Why may restaurants choose to maintain high prices for lobster dishes for ‘psychological reasons’? Are there any other reasons?
The two biggest world exporters have signed trade deals worth $15bn (£9bn). The Chinese Premier and German Chancellor were targeting an increase in bilateral trade to £178bn over the next five years. Premier Wen has also offered support to some of the European countries struggling with their debt. Despite this offer of support, there is something in it for the Chinese economy. China’s foreign exchange reserves are at a record high, but about 25% are invested in euro-denominated assets, hence China has a very strong interest in preventing the collapse of the euro. Furthermore, it is also interested in diversifying its export market to reduce its reliance on US markets. This is particularly important given the growth in protectionism in the US economy. Mr. Innes-ker said:
“China’s dependence and exposure to the US dollar creates issues for its own economy to the extent that it’s a hostage to US monetary policy.”
China’s interest in the European economies may provide an opportunity for the UK economy, as it is a country with ideal investment conditions and is already one of China’s most important trading partners. David Cameron, in a meeting with Wen, has said he wants bilateral trade to increase to £62bn by 2015. The amount is nothing in comparison to the trade deal between China and Germany, but still a significant potential sum for the UK economy. The following articles consider the Chinese economy and its role in the global environment.
Self-interest in China’s helping hand Asia Times Online, Jian Junbo (30/6/11)
China and Germany ink $15bn trade deals as leaders meet BBC News (29/6/11)
Chinese leader’s visit to Germany ends with large trade deals The New York Times, Judy Dempsey (28/6/11)
China offers helping hand to Eurozone Guardian, Helen Pidd (28/6/11)
Rights, trade to dominate Germany-China talks Associated Press, Deborah Cole (28/6/11)
China promises EU ‘helping hand’ with debt crisis Reuters, James Pomfret and Stephen Brown (28/6/11)
We still don’t grasp how little we matter to China Independent, Hamish McRae (29/6/11)
Questions
- What are the benefits of trade?
- Why is it important for the Chinese economy to diversify its export market?
- What does it mean by the statement that China is hostage to US monetary policy?
- Why are China’s foreign exchange reserves at a record high?
- What are the reasons behind China’s interest in Europe? Is it more of a ‘helping hand’ or more to do with furthering China’s own ambitions?
- What might the trade deal between China and Germany mean for trade between China and other nations? Is the deal to the benefit of everyone?
This lower growth in same-store sales is likely to continue the following year as well. Add on to this the lower-than-expected profits, which missed analysts’ forecasts, and you have a prime example of a brand that is suffering because of its customer base and the economic times.
